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In affirming a trial court's holding that a consumer arbitration agreement containing a class action waiver was valid and enforceable, the Kentucky Court of Appeals held that whatever the benefits of class actions may be, the Federal Arbitration Act (FAA) requires piecemeal resolution when necessary to give effect to an arbitration agreement, and the right to bring an action in small claims court preserves any right to litigate.
In Schnuerle v. Insight Communications Co., No. 2006-CA-002121-MR, 2008 WL 4367840 (Ky. Ct. App. Sept. 26, 2008), Schnuerle brought a class action lawsuit against Insight Communications Company, an internet service provider (ISP). Their service contract contained an arbitration agreement and class action waiver. As such, Insight moved to compel arbitration and dismiss the putative class action.
The trial court granted Insight's motion to compel arbitration. In opposing the motion, Schnuerle had argued that the contract was unconscionable because it was a contract of adhesion that barred class actions. The trial court disagreed, holding that the contract was neither procedurally nor substantively unconscionable because consumers have several alternatives in ISPs, and those with complaints could either go to an Insight service agent, arbitration, or small claims court. Schnuerle appealed.
On appeal, Schnuerle made the same unconscionability arguments, which the Kentucky Court of Appeals similarly rejected. The Court agreed with Schnuerle that the contract was one of adhesion, but held that "[a]dehesion contracts are not per se improper . . . they have been credited with significantly reducing transaction costs in many situations." Echoing the trial court, the Court noted that consumers like Schnuerle could choose from several ISPs in the area.
In addition, the Court held that despite the class waiver, consumers still had the right to bring actions in small claims court, thus preserving any right to litigate. Moreover, the Court held that "[t]he arbitration clause within the consumer contract is a favored means within the law of settling disputes." Also, the Court held that "[w]hatever benefits of class actions, the FAA requires piecemeal resolution when necessary to give effect to an arbitration agreement." Accordingly, the Court affirmed the trial court's decision that the arbitration agreement was neither procedurally nor substantively unconscionable.
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